Where to look for stock ideas? In this week's essay, I describe the four places I visit most often.
Investors who manage over $100 million in the U.S. report to the U.S. Securities and Exchange Commission (SEC) on their trading activity every quarter. The 13-F form includes the name of the companies bought and sold and the number of shares the fund owned as of the the filing date.
While this information - the trading activities of investors - is not a call to blindly follow their steps, it serves as an idea generation tool. A starting point to look at the kind of stocks knowledgeable investors are buying and the industries in which they are looking at. It is also an intellectual activity to think what drove them to buy a specific stock in the first place.
Most of the time I can't figure it out. The price may seem too high or the company debt position may be too aggressive. But occasionally there are investable ideas. Seritage Growth Properties, a stock I bought in April of last year is one recent example. I had never heard of Seritage prior to reading that Fairholme Funds, a concentrated, value-oriented fund headed by Bruce Berkowitz, had bought the stock. Later on, I learned that Warren Buffett was an investor, too.
Voltaire once said that the secret to being a bore is to tell everything. But today, with social media websites such as Instagram, with best selling books titled Radical Transparency, the appeal of secrecy faded away. Yours truly, who you will not find tweeting or scrolling, has no other option but to embrace this culture. The detailed annual reports to shareholders of funds managers are a good outcome of the transparency trend.
A few of these fund managers share enough information so that the reader can under their decision-making process. If 13-F filings allow us the see numbers (how many shares were bought), the annual reports to shareholders explain the rationale. I find the latter both very educational and very important.
Two examples. First, I recently bought the stock of Superior Industries International (SUP) because I noticed that six months prior, Mario Gabelli, the legendary value, paid a price that was twice as high.
I also bought the stock of Stericycle link in January of this year because of Laura O'Dell’s (of Diamond Hill) description of the strong franchise and business model link.
With about 109,000 publicly traded companies worldwide and about 3,700 in the U.S. alone, stock screeners narrow the list of investable stocks. I filter out companies with market capitalization less than $100 million and greater than $2 billion. I filter out any company trading at above 10 times the earnings per share and any stock that shows a big increase in outstanding shares, which I define as over 10% compounded annually over a five-year period.
I look at three screeners each week. The first screen is for companies trading at the 52-week low. Famous Dave is a stock I found as a result of this list. Its market price was $4 when I bought it and for no apparent reason jumped to $7 in less than six months.
The second screen looks at stocks trading at discount to reported book value of at least 20%. Like the first screen, this list often returns companies in too much distress or industries which I cannot understand (read: any industry that ends with a "techs": biotech, fintech and hitech), but once in a while a jewel appears. A fond memory was Regal Entertainment. I bought the stock at 45% discount to book value and sold the position at par nine months after.
The third screen is the experimental one. One week I may look for companies trading at high pre-tax earnings to reported assets. In a different week, I may focus on companies with management that is buying back the common stock. And in another week, I may look for companies with a negative equity balance which sometimes arises due to accounting rules and not losses per se. Read the excellent The Manual of Ideas If you are looking for further stock screen ideas.
I also like to keep a certain sense of wonder. I am not fixated on a specific way of finding stocks. Instead I leave room for ideas to come to subconscious or unplanned sources. As Blaise Pascal once said, "The heart has its reasons, which reason knows nothing of."
My purchase of Tupperware serves as illustration. In 24 hours, three things happened: first, my best friend's mom, a Tupperware fanatic, called me out of the blue and asked how I was doing. Second, I was reading Guy Spier's The Education of Value Investor where he uses Tupperware as an example. Third, I lost two of my Rubbermaid lunch boxes and was in the market for a Tupperware myself.
Not as mystical but certainly unusual, I like to research the stock of companies that fall off a widely known index. In the third quarter of 2018, when it was announced that GE was no longer part of the Dow Jones, I read its annual report for the first time (but decided against buying shares - the business is too complicated for me.) But I felt I can reasonably understand the business of Patterson Companies, a $2.0 billion in market capitalization company that fell from the S&P 500 in the first quarter of 2018. I bought Patterson's stock two months after.
So there you have it - four places I visit every week to find bargain stocks. Unfortunately, not unlike your everything-for-99-cents retail store, the stocks offered are often no bargain at all.